Veeco Instruments Inc. (NASDAQ:VECO) Q1 2024 Earnings Call Transcript

Veeco Instruments Inc. (NASDAQ:VECO) Q1 2024 Earnings Call Transcript May 7, 2024

Veeco Instruments Inc. misses on earnings expectations. Reported EPS is $0.3597 EPS, expectations were $0.41. Veeco Instruments Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Greetings, and welcome to the Veeco Q1 2024 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator instructions]. As a reminder, this conference is being recorded. It is now my pleasure to introduce Anthony Pappone, Head of Investor Relations. Thank you. You may begin.

Anthony Pappone: Thank you, and good afternoon, everyone. Joining me on the call today are Bill Miller, Veeco’s Chief Executive Officer; and John Kiernan, our Chief Financial Officer. Today’s earnings release and slide presentation to accompany today’s webcast is available on the Veeco website. To the extent that this call discusses expectations for future revenues, future earnings, market conditions, or otherwise makes statements about the future, these forward-looking statements are based on management’s current expectations and are subject to risks and uncertainties that could cause actual results to differ materially from the statements made. These risks are discussed in detail in our Form 10-K, Annual Report and other SEC filings.

Veeco does not undertake any obligation to update any forward-looking statements, including those made on this call, to reflect future events or circumstances after the date of such statements. Unless otherwise noted, management will address non-GAAP financial results. We encourage you to refer to our reconciliation between GAAP and non-GAAP results, which you can find in our press release and at the end of the earnings presentation. With that, I will turn the call over to our CEO, Bill Miller.

Bill Miller: Thank you, Anthony. Veeco started the year with top and bottom line results toward the high end of our guidance. Revenue totaled $174 million, non-GAAP operating income $29 million, and non-GAAP EPS $0.45. Semiconductor revenue totaled a record for the second consecutive quarter, primarily driven by strong demand for our laser annealing systems. As announced in our press release earlier today, a customer placed a multi-tool laser annealing order, including a nanosecond annealing system, for their 2-nanometer gate all-around process. We’re looking forward to supporting their future ramp plans. I’d now like to provide an overview of the technologies driving the business today, our served available market expansion opportunities, and our investment strategy.

Our portfolio of technologies, highlighted by our new products, is gaining traction, and we continue to expand our footprint to new applications. New device architectures and shrinking geometries require the precision of advanced annealing solutions to increase performance. Our LSA systems continue to gain share at customers’ most advanced nodes, as evidenced by several recent wins. In ion beam deposition, our systems are the technology of choice to deposit defect-free films for EUV mask blank production, and we’re working closely with industry leaders to enable their roadmaps. Looking ahead, we’re well-positioned to serve growing demand for EUV lithography, as well as next-generation high NA lithography. Our wet processing solutions are used for advanced packaging applications, and we continue to see strong demand for high-bandwidth memory.

During the quarter, we shipped several flux-clean systems and receive follow-on orders from leading foundry and memory customers. Veeco’s strategy of investing in advanced logic and memory has enabled our semiconductor business to outperform WFE growth for three consecutive years. Moving forward, we’re investing in new technologies to expand our served available market to a broad range of new applications. Beginning with laser annealing, we expect our served available market to grow from $600 million to over $1 billion, inclusive of both our Laser Spike Annealing and Nanosecond Annealing products. We continue to receive follow-on LSA business for high-bandwidth memory, and are making progress towards winning additional memory customers. We’re equally excited to expand our nanosecond annealing SAM to a broad range of advanced logic and memory applications.

In ion beam deposition, we see opportunities for our SAM to grow to $350 million for front-end semiconductor applications where low-resistance metals are critical. And in the compound semi market, we’re focused on long-term opportunities within power electronics and photonics. Investment in our EVALuation program has been essential to our growth strategy and will remain a top priority. We have two nanosecond annealing and two ion beam deposition EVALuation systems outstanding with leading logic and memory customers. Each are progressing well and our team is highly focused on executing. We’re also targeting an LSA EVALuation system to a second leading memory customer later this year, in addition to EVALuation shipments in the compound semiconductor market.

I’d now like to take a deeper dive into two of our largest opportunities in the semiconductor market. Device scaling challenges at our customers’ most advanced nodes are driving the need for new annealing capabilities. Our nanosecond annealing technology offers a substantial opportunity to broaden adoption of laser annealing to new logic and memory applications. Due to our unique laser and architecture, our system can achieve a lower thermal budget and shorter dwell time versus today’s most advanced annealing solutions. This results in a shallow anneal that can impact only tens to hundreds of nanometers into the wafer, enabling industry inflections such as backside power delivery and 3D devices. Our NSA system can also improve performance by changing the structure and properties of the device, opening the door to several material modification steps.

As we look ahead, we see potential for initial high volume manufacturing orders from logic customers in 2025. We’re also pleased to see strong pull from memory customers excited to evaluate our system’s new capabilities. Turning now to ion beam deposition for 300-millimeter front-end semiconductor applications. Veeco is the industry leader in ion beam deposition technology, which is a key enabler in driving aerial density growth in the hard disk drive industry over decades. This core technology has direct applicability for advanced semiconductor wafer-level manufacturing by solving our customers’ high-value challenges. As device geometries continue to shrink, low-resistance metals are essential to maintaining device performance, and traditional deposition technologies are struggling to address scaling challenges.

Our ion beam deposition technology differentiates itself from incumbent technologies through its ability to achieve superior thin film properties, making it ideal for advanced applications where low-resistance films are critical. Based on Tier 1 customer data, our ion beam deposited tungsten and ruthenium films are demonstrating lower resistance compared to traditional deposition technology. In DRAM, this enables tungsten bit-line scaling while maintaining electrical performance of the device. For logic, ruthenium metallization can enable new integration schemes at future nodes. Looking ahead, we see potential for a high-volume manufacturing orders for memory customers in 2025. I’d now like to touch upon artificial intelligence and the role Veeco plays in the AI chip manufacturing process.

Growth of AI is having a profound impact on leading-edge product roadmaps requiring the most advanced technologies to manufacture higher-performance AI chips. As we look ahead, we expect several Veeco technologies to benefit from growing demand for AI chips. Our LSA systems for transistor formation and IBD systems for EUV mask blanks are production tool of record for GPUs and HBM DRAM. Equally as important, we see future opportunities for our nanosecond annealing and ion beam deposition solutions for each of these applications. With that, I’ll turn it over to John for a financial update.

John Kiernan: Thanks, Bill. Turning first to our revenue for the quarter. Revenue came in at $174 million above the midpoint of our guidance range, up 14% from the prior year, and flat sequentially. Semiconductor revenue increased 29% year-over-year and 5% sequentially to a record $120 million, comprising 69% of total revenue. Sales to the semiconductor market continue to be driven by strong demand for our laser annealing systems. In the compound semiconductor market, revenue increased from the prior quarter to $21 million, totaling 12% of revenue. Revenue from our data storage customers contributed 10%, and lastly, scientific and other made up 9%. Now turning to quarterly revenue by region. Revenue from the Asia-Pacific region excluding China totaled 42%, an increase from 34% in the prior quarter driven by semiconductor customers.

The percentage of revenue from China totaled 37% during the quarter, in line with the prior quarter, led by sales to mature node semiconductor customers. Revenue from the United States totaled 16%, followed by EMEA at 5% of revenue. Switching gears to our non-GAAP quarterly results. Gross margin totaled approximately 44% above the high end of our guidance. Operating expenses totaled $48 million in Q1, in line with guidance. Tax expense for the quarter was approximately $4 million, resulting in an effective tax rate of 13%. Lastly, net income came in at approximately $26 million, and diluted EPS was $0.45 on 60 million shares. And moving to the balance sheet and cash flow highlights. We ended the quarter with cash and short-term investments of $297 million, a sequential decline of $9 million.

From a working capital perspective, our accounts receivable increased by $4 million to $107 million. Inventory increased by $5 million to $243 million, while days of inventory declined to 218 days, and accounts payable increased by $12 million to $54 million. Customer deposits included within contract liabilities on the balance sheet declined by $25 million to $72 million. Cash flow from operations came in at $9 million, and CapEx was $6 million. Now, turning to Q2 non-GAAP guidance. Q2 revenue is expected to be between $165 million and $185 million with gross margin between 43% and 44%. We expect OpEx between $46 million and $48 million, net income between $22 million and $29 million, and diluted EPS between $0.38 and $0.48 on 61 million shares.

And now for some additional color beyond Q2. Based on our current visibility, we’re reiterating our 2024 revenue outlook between $680 million and $740 million. We also continue to target diluted non-GAAP EPS for the full year between $1.60 and $1.90 per share. With that, I’ll now turn the call over to the operator to open up the Q&A.

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Q&A Session

Operator: Thank you. Ladies and gentlemen, at this time, we’ll be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Charles Shi with Needham & Company. Please proceed with your question.

Charles Shi: Hi. Good afternoon. Congrats on the good results, steady execution for another quarter. Maybe the first question, I want to dig a little bit into the laser anneal product that you guys put out the press release this morning. You may have addressed this before, but I think at the top of my mind for a good amount of folks is the nanosecond anneal. Does it — is it the incremental opportunity on top of what you already have with the laser anneal on the best nodes or maybe one replaces another and maybe a little bit of cannibalization going on there? Thanks.

Bill Miller: Yes, Charles, let me give a little background. So we’ve been working, as you know, on future nodes for many years with our most advanced customers in logic. And our laser spike anneal is qualified at all leading logic customers for their gate-all-around architectures. Separately, we have NSA or nanosecond evaluations at two of the three leading logic players and have pulled from the third for an EVALuation system. So NSA is being evaluated for gate-all-around, but also backside power distribution and 3D structures. So as you mentioned in our press release during the quarter, we received both LSA and NSA orders for a new customer for their two nanometer gate-all-around project. But to get to the crux of your question regarding NSA potentially cannibalizing LSA, so historically the contact annealing step for a transistor consisted of multiple anneals followed by an LSA step.

As the customers are moving towards gate-all-around, customers are considering replacing one of the multiple anneal steps with LSA and they’re evaluating nanosecond anneal NSA for a follow-on step. Although, decisions have not been finalized with our customers, it does appear in gate-all-around that NSA does not cannibalize LSA for gate-all-around. And that being said, NSA opens up unique opportunities for the company in applications like backside power distributions and 3D structures. So I would say largely it does not cannibalize LSA.

Charles Shi: Got it. I understood. Maybe we’ll keep asking you this question, but hopefully we get a firm confirmation on this being incremental to LSA opportunities. Secondly, I want to ask about the HBM opportunity. So, specifically, I’m asking about LSA for HBM because going back a couple quarters, you guys were not so certain where the LSA was qualified is it a standard DRAM or versus HBM. But based on your prepared remarks, you did sound slightly more assertive that this is going into a high bandwidth memory. I just want to confirm, am I overthinking this or this is indeed the case? Thanks.

Bill Miller: So, Charles, I would say originally we were qualified in the logic chip in the first level of the high bandwidth memory. And now we’ve been qualified with one customer, with our one customer, for the peripheral logic on the DRAM stack, DRAM devices. So we went from having the annealing step on the logic device to having, adding the peripheral steps on all of the HBM memory stack. Does that clarify for you, Charles?

Charles Shi: Yes, yes, yes. Definitely, definitely. It sounds like it’s the baseline, right, that the HBM, that’s the first one. But the second one I want to clarify even more. You said there’s a peripheral circuit on each of the DRAM stack, but isn’t that part of the standard DRAM manufacturing also? What I’m — I’m just trying to think, how much of the opportunity is there? Is it really only limited to the second application you talked about? Is it really only limited to HBM or that applies to all the standard DRAM, DDR5 or more advanced than that DRAM there? Thanks.

Bill Miller: So that’s the area I don’t have crystal clear understanding. I think to the first order, the peripheral logic in the HBM stack and in standard DRAM are very similar, but I’m not sure of the exact details of that to answer that affirmatively yet.

Charles Shi: Thanks, Bill. This has been very helpful. I’ll hop back to the queue. Thanks.

Bill Miller: Thank you, Charles.

Operator: Our next question comes from the line of Rick Schafer with Oppenheimer. Please proceed with your question.

Wei Mok: Hi, this is Wei Mok on the line for Rick. Congrats on the results and the LSA, NSA order announcements. So my question is, considering you guys didn’t update your 2024 outlook, is it fair to say that these incremental orders start to shift in 2025? So I was curious, how do you guys think about that outlook looking into 2025?

Bill Miller: Yes. So, Wei, when we gave our guidance for the year, this business, if we shift one system at the end of this year, beginning of next year is timing, really doesn’t have a significant impact on our full year view for 2024.

Wei Mok: Okay, great. Thank you. My next question is on backlog. I think you guys have around $500 million in backlog entering the year led by semi. So considering this backlog, what is the mix of your LSA between trailing and leading edge today? And how does this mix look at the end of the year?

Bill Miller: Yes, I would say what we saw in our business in 2023 and into the beginning of 2024 was more laser annealing for the trailing node and particularly China so that we saw strength there. And that was sort of a change from if you go back prior to 2020 — 2023 where we saw typically two-thirds of the business would come from the leading edge. I think as we progress throughout 2024, the expectation is and we start to see engagements with customers that we would see a pickup in the leading edge in the second half of this year and could probably sort of exit the year with a more balanced backlog.

Wei Mok: Got it. Thank you. And maybe one last question if I may. It’s on NSA. Considering this is next generation and a more advanced technology compared to LSA, how much of an — like a pricing uplift do you expect from NSA compared to LSA? Thanks.

Bill Miller: Yes, we do expect a higher price for our NSA for the additional capabilities and value there. I would estimate the 10% to 15% higher ASPs would be our expectation.